- The Washington Times - Sunday, February 29, 2004

Maryland’s tax agents have moved from indifference to cigarette smugglers only five years ago to waging one of the region’s most aggressive campaigns to nab tobacco bootleggers, who authorities say reap about $1 billion a year in illicit operations.

Agents from the Office of the Maryland Comptroller arrested just one cigarette smuggler in 1998 and seven in 1999. By 2003, the number of arrests had climbed to 121, with tax agents seizing 139,353 packs of contraband cigarettes worth $560,1999.

In the first six months of fiscal 2004, which began June 30, Maryland’s tax police arrested 108 persons and confiscated more than 100,000 packs of smuggled smokes valued at $434,594, according to the comptroller’s field-enforcement division.

“Maryland is one of the states that are out in front in this type of investigation,” said Jerry Bowerman, chief of the alcohol- and tobacco-smuggling division of the federal Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). “They have more of the proactive types of investigations.”

By comparison, the District doesn’t investigate cigarette-smuggling cases. And neither the chief prosecutor for the Delaware Attorney General’s Office nor the top criminal investigator for the West Virginia Tax Department could recall a single cigarette-smuggling case in their jurisdictions in recent years.

Law-enforcement officials say higher cigarette taxes nationwide in the past 10 years have spawned a cigarette-smuggling racket that finances crime syndicates and terrorist groups.

“Cigarette smuggling costs the United States more than $1 billion in lost revenue every year, while pumping incredible profits into criminal organizations,” Michael Garcia, assistant secretary of Immigration and Customs Enforcement (ICE), said late last month.

“It exposes a vulnerability to the American economy and a vulnerability to U.S. borders. The number of ICE investigations into tobacco smuggling has increased by roughly 300 percent since April 2001,” Mr. Garcia said in a statement after federal agents had conducted the largest crackdown on cigarette smuggling in U.S. history.

The arrests of 10 persons last month in Texas, New Mexico, New York, Florida and California underscored the scope of cigarette smuggling in the United States and efforts by law-enforcement agencies to stop it.

The smuggling scheme itself is simple: Buy thousands of cigarettes in low-tax states such as Virginia, which has the nation’s lowest tax rate (2.5 cents per pack), and truck them to places such as New York City, where state and city taxes add as much as $3 to the price. Add the proceeds from counterfeit smokes — look-alike packs of Marlboros or Newports, usually smuggled from China — and the profit motive increases tenfold.

In last month’s arrests, federal agents broke up a ring plotting to bring 5 million packs of bootleg cigarettes into the country. Authorities seized 2.5 million packs valued at about $20 million.

The indictment unsealed in El Paso, Texas, said that Jorge Abraham, 34, of Sunland Park, N.M., masterminded the plot to smuggle truckloads of untaxed cigarettes to distributors in Texas, California and New York, who sold them at a significant markup.

Cigarette smuggling in the United States also has been linked to international terrorist groups.

Last year, FBI and ATF agents broke a smuggling ring operating out of the Seneca Nation of Indians’ Cattaraugus reservation in New York.

From 1996 until last year, the group funneled some of the $2 million in illegal profits to Hezbollah’s “orphans of martyrs” program, which benefits families of Hezbollah terrorist killed while committing acts of terror.

The ring trafficked tax-free cigarettes from the reservation to stores in Michigan, where the state tax is the 10th-highest in the nation, at $1.25 per pack.

To conceal the crime, the smugglers stuck counterfeit Michigan tax stamps on the cigarette packs. They also engaged in credit card fraud, money laundering, witness tampering and arson, according to court records.

The ringleader, Elias Mohammed Akhdar, a Lebanon native accused of participating in Hezbollah attacks, was sentenced last month to 70 months in jail after pleading guilty to conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act.

Federal agents recently told The Washington Times that they are on the trail of more cigarette smugglers with ties to other terrorist groups.

Maryland Comptroller William Donald Schaefer warned about cigarette-smuggling profits financing terrorism five years ago when he retooled his agency to go after the smugglers. At the time, his comments provoked derision from radio talk-show hosts in Baltimore.

Mr. Schaefer’s crackdown coincided with an apparent spike in cigarette bootlegging after Maryland raised the cigarette tax from 36 cents to 66 cents per pack in 1999 and then to $1 in 2002.

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Maryland now has the 13th-highest cigarette tax in the nation, a rank shared with the District, Alaska and Maine.

“We are pretty hard on smugglers,” Mr. Schaefer said recently. “For one, its our job to catch smugglers. Second of all, it is our job to collect taxes, and they are defrauding the citizens of Maryland when they bring cigarettes in and try to sell them without the tax.”

In 1999, the comptroller hired Larry Tolliver, a former superintendent of Maryland State Police, to head the field-enforcement division and crack down on smuggling. Mr. Tolliver recruited a team of retired narcotics, homicide and burglary investigators — a troop of seasoned detectives he calls the “Over-the-Hill Gang.”

The comptroller’s agents started gathering intelligence, working surveillance and cultivating informants. Before long, the number of arrests and seizures started to grow exponentially.

Maryland authorities made two interdictions Jan. 20, arresting three men and confiscating more than 11,000 packs of cigarettes valued in excess of $45,400.

First, a comptroller’s agent stopped a New York man driving on Route 113 in Worcester County with 4,594 packs of untaxed cigarettes in his car. Later that day, Maryland State Police stopped a Florida man and a Virginia man on Interstate 95 near Perryville and found 6,700 packs of untaxed cigarettes stuffed in their Dodge Caravan.

“It’s big, big money doing this,” Mr. Tolliver said. “One guy we had a long time ago was running, like, four loads a week. He was making over $1,000 a week and he was just the driver.”

Mr. Tolliver said he and his agents used to assume most of the cigarettes were headed to New York, where the taxes are among the highest.

“It’s not really true any more,” he said. “You have gotten to where cigarettes are just so high.”

Cigarette smuggling across international borders, including trafficking in counterfeit cigarettes, is another growing problem. The World Bank estimates that governments lose as much as $30 billion to international cigarette smuggling.

Counterfeit cigarettes turned up for the first time in Maryland last year. Comptroller’s agents seized from a Baltimore warehouse about 12,500 packs of counterfeit Newport cigarettes worth more than $60,000.

In recent years, the United States has experienced a dramatic influx of smuggled cigarettes, usually counterfeit brands manufactured in China. Cigarettes didn’t even make the U.S. Customs and Border Protection’s top-10 list of seized items in 1998 or 1999.

Customs agents confiscated more than $4.2 million worth of cigarettes being smuggled into the country in 2000, accounting for 9 percent of the agency’s seizures. Cigarettes rank fifth on the list that year, behind apparel, computer parts, toys and media items, such as video games or DVDs.

In the first six month of fiscal 2003, cigarettes topped the list. They accounted for 59 percent of seizures and had a value of more than $22.2 million.

Many economists say that higher taxes spur increased smuggling, but they argue over whether taxes are effective in reducing smoking, especially among teenagers.

However, economists say that cigarette smuggling cuts the benefits of taxation as a tobacco-control policy. Increased smuggling reduces the revenue generated by a higher tax, and the extra expense of trying to catch smugglers absorbs even more tax dollars.

“As taxes go up, smuggling is more and more prevalent,” said Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology who supports taxation to curb smoking and promote public health. “It is certainly an offsetting cost against increasing taxes.”

Smuggling also creates opportunities for corruption that can undercut public confidence in law-enforcement authorities, economists say.

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